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Tuesday, November 27, 2007

Affiliated Computer Services: The Hidden M&A Deal

So another deal development stuffed into the Wednesday Thanksgiving dump occurred with Affiliated Computer Services.  Last Wednesday, ACS announced the resignation of its independent directors and their replacement with a new set of independent directors endorsed by Darwin Deason, the controlling shareholder of ACS.  In connection with this appointment, the newly resigned directors agreed to dismiss without prejudice their lawsuit against ACS & Deason et al. arising out of the failed buy-out proposal made by Cerberus.  For full details of this litigation and the events leading it up to it see my post ACS:  The Legal Analysis.

This is a big disappointment.  I would have hoped that the old independent directors would have stood up to Deason and investigated the alleged breaches of fiduciary duty by him and the other officers of ACS arising out of the ACS failed sale process.  Instead, they appear to have decided to simply walk away from their positions with the likely understanding that ACS would pay their fees and expenses and otherwise let them go without their own alleged suit (although in all fairness to ACS if there was such a written understanding it would be required to be disclosed on Form 8-K and no such understanding has been).  Moreover, the new directors whom the old directors now agree are independent take their positions at a company where Deason has contractual arrangements providing him almost full control over its operations down to his ability to approve the expense reimbursements of the CEO.  One would have hoped that the price for serving demanded by these independent directors would have been a new arrangement which provided them normal control over the company.  In the end, this will all be left to the plaintiffs lawyers -- I have not read their complaints but I do hope one of them challenges the validity of Deason's contractual and By-law powers under Delaware Law (see my post here on this).

But the M&A deal here was still to come.  That same day, ACS also announced that "the Board of Directors has endorsed a proposed $1 billion share repurchase program and has authorized the company to purchase up to $200 million of the company's Class A Common Stock, effective immediately, under this program."  In connection with this announcement, Deason agreed to suspend his contemplated purchase of "an additional one million shares of the company's Class A common stock."  The company stated that he did so because of affiliate repurchase restrictions.  Isn't that nice of him? 

But why wouldn't he suspend his purchases?  My calculations find that if this program is fully implemented it will raise Deason's voting control over the company above the magic 50% number.   According to ACS's last proxy, Deason controls 41.59% of the company votes.  At the company's current share price of approx. $41.50 a share, the full billion dollar repurchase would retire approx. 24 million Class A shares and raise Deason's holdings of Class A shares from roughly 2.8% to 3.8% of the outstanding total class A shares (based on the proxy statement's figures of 92,530,441 shares of Class A common stock and 68,434,055 Class A shares outstanding after the full buy-back).  Not such a big rise. 

But here is the kicker -- the full implementation of the buy-back provisions, based on my calculations, provides Deason with approximately 51% of the voting control due to his ownership of Class A and B shares (based on the proxy statement figure of 6,599,372 shares of Class B common stock issued and outstanding all held by Deason --Deason's ownership of 6,599,372 million Class B shares with 10 votes a piece and 2,619,439 Class A shares with one vote a piece would give him 68,613,159 votes out of an estimated 134,427,775 votes outstanding after full implementation of this buy-back and based on my calculations from the latest share figures in ACS's 2007 proxy).

So, these new independent directors (who I assume approved this buy-back) have now implemented a plan through which Deason can perhaps obtain the majority control he likely covets.  Talk about off to a good start.  And think about the legal issues this now raises -- if this plan is fully implemented and Deason does indeed gain a majority vote, has the company triggered Revlon duties here by passing full control to Deason despite the effective control he already exercises?  If so, has the board already breached their fiduciary duties by failing to follow procedures designed to obtain the highest price reasonably available?  And if either of the two answers is no, has the board otherwise breached their fiduciary duties by initiating this transaction on this basis without putting into place adequate protections for the minorities or otherwise procedures to ensure ?  And this is even before Deason attempts to initiate another going-private transaction (if he decides to do so). 

None of this was disclosed in the three press releases issued by ACS on Wednesday. 

http://lawprofessors.typepad.com/mergers/2007/11/affiliated-comp.html

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